“The early signs of what retirees are doing with their newfound pension freedoms might initially seem worrying. So far, they have mainly been taking cash. However, this is largely because many retirees still have other income sources such as DB pensions. As this changes over time, so too could the way retirees use their DC retirement pots. In addition, a significant percentage of these retirees are prudently re-investing the cash into other investments such as ISAs and property.
“Around 6.8m individuals have now been enrolled in DC pensions via auto-enrolment, and schemes are also now provisioning for companies with as few as ten members. This backdrop has led to 15% annual growth in the UK’s DC market, which if sustained, could move it from £300bn to £900bn in under ten years. However, significant longer-term challenges remain, as most DC pension pots are currently small, with DC savings only sporadic at best before the recent introduction of auto-enrolment. Furthermore, contribution levels have yet to rise, amid a backdrop of stagnant wage levels in real terms. Generation X is therefore increasingly likely to be faced with a tough message: “work longer and save as much as you can.”
“While we welcome the increase in freedom, we should not forget that it is commensurate with greater personal responsibility. There are risks, too, as highlighted by recent instances of fraudulent ‘advice’ being given to move pension pots into questionable international investments. Increased freedom, therefore, also necessitates a move towards better governance. By providing efficient retirement solutions for the full retirement journey, we believe we can help, and are noting a shift from single trust solutions towards a comprehensive Mastertrust approach for smaller schemes in particular.
“The move towards better and more targeted guidance is another key trend. Schemes need to play their part in encouraging members to contribute more to their pensions, and from an earlier age. This means providing relevant, straightforward and timely communication as a key pillar of improved guidance and a broader financial education to enable people to achieve their retirement goals.
“The shift in investment strategies is my final trend for 2017. Following Freedom and Choice, there is greater uncertainty over what approach individuals will adopt come retirement. Schemes therefore need an investment that is well suited to being de-risked towards any of cash, annuity purchase and income drawdown. That said, if DC savers are likely to need to work longer, then it could be important to remain invested for longer in a vehicle such as a multi-asset fund, as de-risking too early represents a key risk in our view.
“Amid all of this, the ‘value for money’ debate in pensions is changing and, along with Freedom and Choice, is a key driver of today’s DC market trends. The debate is no longer solely focused on lowering fees; it is also about raising the bar in terms of the service people receive. This means providing relevant communications and high quality, low-governance solutions for people’s entire retirement journey.”
|
